2014 (7) TMI 962 - AT - Income Tax

Creditworthiness of amalgamating companies - Investment in shares of amalgamating companies Held that - From the above provisions of section 394A of the Companies Act, 1956, it is clear the If the revenue wants to object to the proposed scheme of amalgamation, it has to do so in the course of proceedings before the High Court but before the final order is passed - Whenever such objections have been raised, these have been considered on merits by the concerned High Court and also incorporated the condition for safeguarding the interest of revenue in the very scheme - once a scheme of amalgamation is approved by High Court no authority should be allowed to tinker with the scheme - neither the official liquidator nor the Regional Director nor Central Government raised any objection to the scheme of amalgamation - the revenue has nothing to say at the time of approval of scheme by Hon ble High Court Relying upon Woodcraft Products Limited (In Re) 1977 (1) TMI 103 - HIGH COURT OF GUJARAT - it is not open to the revenue to go into the amalgamation reserve as per amalgamation scheme approved by Hon ble Calcutta High Court Decided against Revenue. Colourabel device to evade tax Whether the amalgamation itself is a colourable device to evade the tax by amalgamating companies or not Held that - No colourable device which the assessee has adopted in the scheme of amalgamation as sanctioned by High Court - The amalgamation reserve has properly been explained by the assessee by filing details of assets and liabilities in consequence to amalgamation - The Balance Sheet of transferor companies, wherein the assets and liabilities have been transferred to the transferee company i.e. the amalgamated company are on the record of the revenue and everything is explained before the AO - The AO could not pin point any defect in the issue of non-allotment of shares on amalgamation to the shareholders of amalgamating companies due to cross holding and due to that shares of the four companies inter se got cancelled - Following the decision in Union of India And Another Versus Azadi Bachao Andolan And Another 2003 (10) TMI 5 - SUPREME Court - the revenue must have found out what is tangible in an objective manner but they failed to do so - assessee has completely disclosed the transaction in the amalgamation scheme presented before High Court, which was duly approved Decided against Revenue. Balancing of charge on valuation of shares Capital receipt or revenue receipt - Held that - Shares held by the transferor companies between themselves inter se, it was more than 3/4th and therefore the provisions of section 2(1B) have not been violated - there is no bar to hold / acquire the shares after effective date of merger and before the merger orders are passed, by the Amalgamating Companies which in effect neutralized the cross holdings and cancelled the holdings inter se of the four companies - Following the decision in CIT Vs. Bharat Development Pvt, Ltd. 1980 (8) TMI 18 - DELHI High Court - due to inter se holdings no shares were required to be issued to the shareholders of the amalgamating companies by the amalgamated company Decided against Revenue.

Summary

Issues Involved:
1. Whether the Revenue can question the creditworthiness of the amalgamating companies after the scheme of amalgamation has been approved by the jurisdictional High Court.
2. Whether the amalgamation is a colorable device to evade tax.
3. Whether due to cross holdings inter se, no shares were required to be issued by the transferee company.

Detailed Analysis:

Issue 1: Creditworthiness Post-Amalgamation Approval
The Revenue questioned the creditworthiness of the amalgamating companies, despite the scheme of amalgamation being approved by the Hon'ble jurisdictional High Court. The CIT(A) observed that once the High Court approves an amalgamation scheme, it is presumed that all relevant issues, including creditworthiness, have been considered. The AO's attempt to treat the amalgamation reserve as unexplained cash credit under Section 68 of the Income Tax Act, 1961 was dismissed by the CIT(A), who emphasized that the High Court's order is final and overrides other considerations. The tribunal upheld this view, noting that the amalgamation reserve, being a capital receipt, could not be treated as a revenue receipt and that the High Court's approval precludes the Revenue from questioning the creditworthiness of the amalgamating companies.

Issue 2: Alleged Colorable Device to Evade Tax
The Revenue alleged that the amalgamation was a colorable device to evade tax. The CIT(A) and the tribunal referred to the Supreme Court's judgment in Azadi Bachao Andolan, which clarified that legitimate tax planning is permissible and cannot be deemed a colorable device unless it involves sham transactions. The tribunal found no evidence of such a device in this case, noting that the amalgamation scheme was approved by the High Court after due consideration of all relevant facts. The tribunal concluded that the amalgamation reserve was properly explained and that the Revenue's allegations were unfounded.

Issue 3: Non-Issuance of Shares Due to Cross Holdings
The Revenue contended that no shares were issued to the shareholders of the amalgamating companies due to cross holdings, which was abnormal. The CIT(A) and the tribunal found that the cross holdings between the four amalgamating companies resulted in the neutralization and cancellation of shares, obviating the need for issuing new shares. The tribunal noted that this arrangement was part of the amalgamation scheme approved by the High Court and that the provisions of Section 2(1B) of the Income Tax Act, which require 3/4th of the shareholders of the amalgamating companies to become shareholders of the amalgamated company, were not violated. The tribunal upheld the CIT(A)'s decision, stating that the High Court's approval of the scheme precludes any further questioning of the share issuance process.

Conclusion:
The tribunal dismissed the Revenue's appeal, affirming the CIT(A)'s decision to delete the addition of Rs. 69,64,34,089/- made by the AO. The tribunal concluded that the High Court's approval of the amalgamation scheme is final and binding, precluding the Revenue from questioning the creditworthiness of the amalgamating companies, alleging a colorable device to evade tax, or challenging the non-issuance of shares due to cross holdings. The tribunal emphasized that the amalgamation reserve is a capital receipt and cannot be treated as a revenue receipt, and that the High Court's approval ensures compliance with all relevant legal provisions and public interest considerations.